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Business Week
June 23, 2003
Intel Inside -- Russia, That Is
Its investment arm is pouring millions into the tech sector
By Andy Reinhardt in Paris, with Paul Starobin in Moscow

Russia doesn't exactly spring to mind as the center of hot technology venture-capital plays. Despite a wealth of technical talent and a plentiful supply of unemployed engineers, the country hasn't succeeded in channeling much investment capital into tech startups. True, in the decade since the London-based European Bank for Reconstruction & Development (EBRD) began pumping money into 11 regional development funds across Russia, the EBRD and others have invested an estimated $450 million in business incubators and new companies. But that's about the same amount raised by U.S. startups every month in 2001, during the waning days of the economic boom. New venture-backed Russian tech companies number only in the dozens.

Yet there are signs that high-tech capital is finally trickling into Russia. The clearest signal came in mid-May, when Intel (INTC ) Capital, the $870 million investment arm of the world's largest chipmaker, opened a Moscow branch and poured $4 million into a fast-growing Russian technology company called ru-Net. It's the first of what parent Intel Corp. hopes will be a handful of deals that fund promising innovations and the growth of Russia's tech infrastructure. "We're investing not just to grow the market but also to identify technologies we can help bring out to the rest of the world," says Marie E. Trexler, Intel Capital's managing director for Central and Eastern Europe, who oversees the Moscow operation from London.

Other potential foreign and domestic investors will be closely watching Intel's experiment. Until now, says Charles Ryan, executive chairman of Moscow investment bank United Financial Group, most private equity in Russia has gone into oil, timber, and agriculture. "There is woefully little investment in high tech," he says. The country's wealthy oligarchs shied away because Russia's laws didn't safeguard intellectual property.

Intel's arrival should assure local and foreign investors that "there's another investment option -- in technology," says Jason Downes, ru-Net's general director. Albina Nikkonen, executive director of the St. Petersburg-based Russian Venture Capital Assn., agrees: "It's a very positive sign that a giant such as Intel has decided to finance our technologies." She hopes Intel will join her organization. That would be quite a coup: Intel Capital has poured more than $4 billion into 1,000 companies worldwide since it was established in the early 1990s and now ranks as the world's leading venture capitalist.

Trexler thinks the time is right for Russia because the country's legal system now offers adequate protection for minority investors. And tech is booming: Both Intel and Microsoft (MSFT ) Corp. say Russia ranks among their fastest-growing markets. Market researcher IDC figures the country's information-technology sector should surge 12% this year -- twice the predicted global rate -- to $5.5 billion in sales. That helps explain Intel's interest. The chipmaker wants to find esoteric new technologies in areas such as materials science and software, but it also aims to promote its mainstay microprocessors. Ru-Net, for instance, runs a subsidiary known as TopS Business Integrator that will use $10 million raised from Intel and other investors to expand its fast-growing PC and server-distribution business.

Intel Capital is not alone in attempting to exploit Russia's high-tech talent pool. A few European firms have also set up shop. One, Frankfurt-based Quadriga Capital, opened an office in St. Petersburg last summer, and it has already raised $30 million of a planned $120 million fund. Most venture-capital outfits are far smaller, though. One significant hurdle for all of them has been the difficulty in cashing out. Of the 76 companies funded by the EBRD since 1994, only eight have been sold to other investors. Lack of liquidity also has made floating shares on the Russian stock market difficult. But capital markets are slowly beginning to mature. Last year, Moscow-based RosBusinessConsulting staged Russia's first-ever technology initial public offering and raised $13 million. For budding entrepreneurs, increased investment inflow could be the first step in creating a silicon boom on the steppes of Russia.

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